Luke Kanies believes he’s found the solution to Portland’s economic woes.

Strike that: Luke Kanies believes he is the solution.

“Two years ago, when I moved to town, people were like, ‘Oh, you can’t get money in Portland,” says Kanies, the CEO of local software startup Puppet Labs. “And a lot of companies are proving you can.”

To Kanies, thinking about new job-creation strategies is a waste of time. “What’s gonna get startups going is startups getting going,” he says. “What’s gonna do it are great frickin’ companies, having great success.”

For decades, Portland’s economy has been waiting for the software explosion—the bonanza of code geeks who will toil in their garage offices and build the next Google. It hasn’t happened. While the past five decades have seen hardware flourish in the “Silicon Forest” warehouses of Tektronix and Intel in Washington County, Portland’s software scene has been more comfortable sharing free “open source” code than engaging in cutthroat competition. The city’s developers missed out on the digital booms that put Microsoft in Seattle and Facebook in Palo Alto, Calif. Portland’s software scene has lagged behind even small regional hubs like Austin, Texas, and Boulder, Colo.

In 2009, software accounted for 17,610 jobs in Multnomah, Washington, Clackamas and Clark counties—a 2 percent sliver of the region’s workforce. And the consensus was that out-of-state investors weren’t willing to fund Portland startups.

But a handful of aggressive young Portland software tyros are finally making it rain seed money.

In the past year, venture capitalists have begun investing in Portland’s tech startups at an accelerated rate: Venture capital investments in Portland nearly tripled in a year to $140 million in 2010—the highest numbers since the dot-com bubble, with software startups accounting for $60 million of that total.

The Pearl District and Park Blocks have become dotted overnight with the sleek new headquarters—in every case, coyly unmarked by any street shingles—of Internet and software companies flush with cash.

$5 million for Kanies’ Puppet Labs last July.

$5.4 million for mobile app builder Urban Airship last November.

$8 million for online storefront creator ShopIgniter two weeks ago.

While Mark Zuckerberg is rumored to be shopping for a house in Portland, the city is already sprouting wunderkinds who want to invent the next Facebook. They’re entrepreneurs like Kanies: brash, hyperactive, self-proclaimed “dorks” risking investors’ bankrolls on inventions they haven’t proven are profitable.

The pace and arrogance of these startup gamblers is evident in people like Kanies. Take the way he dismisses Tektronix, the wildly successful Beaverton oscilloscope manufacturer that launched the Silicon Forest in the 1970s and spun off international software firms like Mentor Graphics and Metheus Corporation. Told that Tektronix is planning to open a museum in Beaverton, Kanies replies: “They are a museum now.”

In December, Mayor Sam Adams named software development one of four “economic clusters” he planned to prioritize, after the Portland Development Commission spent $30,000 surveying developers to create a business-nurturing plan called PDX 11. But last month, the Portland Development Commission laid off 17 employees—including Gerald Baugh, the city’s creator and manager of the software-cluster plan.

That glitch suggests what a steep climb the Portland software landscape faces.

The only publicly traded software company in Oregon remains Mentor Graphics, out in Wilsonville. The Portland startup best poised to go public was Jive Software, which in 2009 secured $12 million in venture capital—and moved its headquarters to Palo Alto, where it promptly received another $30 million in investments.

Ward Cunningham, the Beaverton programmer who invented the wiki—a website that allows collaborative editing, like Wikipedia—says tech investors have told him that Portland simply doesn’t have enough executive talent to compete with Silicon Valley. 

“The way it was put to me, there wasn’t a ‘sea level’ of talent among CEOs available to venture capitalists,” says Cunningham, who now works as the chief technology officer for a startup in Los Angeles. “This can be fixed, of course. The way you learn how to be a good CEO is to run a few startups.” (Editor's note: After the publication of this story, Cunniningham clarified that he meant "C-level," the pool of CEO talent.)

The executives you’ll meet in the following pages are raising the sea level. They are the players identified by consensus from observers of Portland software as among the most promising innovators in the city. They share little in common but a passion for Apple Cinema Display computer monitors. But they all believe that their industry is about to transform—and that they’ll be the agents of that change.

Credits: vivianjohnson.com

The Success Story

Name: Luke Kanies

Age: 35

Title: CEO, Puppet Labs

Venture capital funding: $7.25 million

What colleagues say: “[Puppet Labs is] in a leadership position. I don’t know that they’ve figured out how to grow that as a business.”

“He’s a Reedie. He’s totally a Reedie.”

Puppet Labs is the kind of company open-source developers have dreamed of: a startup that lures investor dollars while giving away the guts of its software for anyone to use and improve. 

In the two years since Luke Kanies moved Puppet Labs to Portland from Nashville, it has grown from three employees to 41. In January, it opened new headquarters in a 9,000-square-foot fifth-floor office atop a building in the Park Blocks, with exposed-wood paneling, a bike rack with room for 18 employee bicycles, and a lease specifically negotiated to allow dogs. Its product—Puppet, a software that helps large networks of computers run themselves—is used by the New York Stock Exchange, German air traffic control and Zynga, the company that created the online game FarmVille.

Just one problem.

“We’re not profitable,” says Kanies. “In six months, we could be making scads of cash or be out of the business. Not because we’re ignorant, but because we’re here to gamble. We’re here to try new things every day—and if that works, it’s going to be awesome, and if it doesn’t work, then we’re going to have some really impressive articles to write.”

Because Puppet Labs hands out its signature product for free, it will have to invent a proprietary software to accompany Puppet—one it can sell.

In Kanies’ words, this yet-undiscovered software is the “commercial product that causes people to keep putting coins in the machine, to be slightly crass about it.” He hopes brand loyalty will get clients to buy the next Puppet product.

If Puppet Labs fails to develop this, the company will rapidly find itself reduced to a customer-service center for its free software.

Kanies admits this the same way he says everything: rapid-fire and brusque, his mouth curled between a smile and a sneer. Raised on a commune, Kanies got a Reed College chemistry degree and worked seven tech jobs in 2 1/2 years, developing a specialty in programs that manage large numbers of computers. His office is almost entirely undecorated, save for a few jagged streaks of red dry-erase marker painted on the walls by his 2-year-old twin daughters.

His talk often veers toward the dramatic: “Every time somebody chooses not to use Puppet, it’s like a stake in my heart. Every time somebody says a good thing about a competitor on Twitter, I get this soul-crushing fear of total and utter destruction.”

But Kanies waves away the suggestion that it ran against good sense to start a company with software nobody pays for.

“It’s counterintuitive that Facebook would build a website that doesn’t charge,” he says. “It’s counterintuitive that Twitter doesn’t charge for its website. Google doesn’t charge you to use their website. Everything seems counterintuitive until it’s obvious.”

Full disclosure: An employee at Willamette Week—neither the author nor the editors of this piece—is married to an employee at Puppet Labs.

Credits: vivianjohnson.com

The Speed Freak

Name: Scott Kveton

Age: 37

Title: CEO, Urban Airship

Venture capital funding: $6.5 million

What colleagues say: “I don’t think Scott ever met an opportunity he couldn’t angle his way into. If he wasn’t running a startup, he’d probably be running a drug cartel.”

Scott Kveton began attracting clients to his mobile application company Urban Airship with a bake sale. Actually, more of a bake giveaway.

It was the 2009 Apple Worldwide Developers Conference in San Francisco, and Kveton didn’t have a ticket to the “Stevenote”—Steve Jobs’ annual speech, where the Apple CEO would debut the iPhone 3GS smartphone. But Kveton had heard that Apple devotees began lining up for the speech the night before. So he flew down from Portland, bought $1,500 worth of Danishes and muffins from Costco, and took a cab to the Moscone Center at 5 am to start handing out Urban Airship handbills and pastries to the people in line.

“It turns out,” says Kveton, still sounding genuinely surprised, “it’s a captive audience that doesn’t tend to plan ahead, so they’re all really hungry. And it’s the perfect target audience for us, because they’re rabid, fanatical app developers. Probably the best 1,500 bucks we ever spent.”

Kveton later learned the stunt caught the attention of video-game maker Tapulous and sports behemoth ESPN, who joined a roster of Urban Airship clients that includes Warner Brothers, Disney and Groupon. Urban Airship makes apps for apps: It makes the programs that allow app companies to send out mass texts and take your money. The startup grew fast: In two years, it has sent 3.6 billion notifications, and its 16,000 production apps are currently used on 160 million mobile devices. It became profitable in six months, but is already back in the red as it prepares for expansion.

That speed and improvisation is typical of Kveton, who has flipped through entrepreneurial projects like other people move through the buffet line at Izzy’s. After graduating from Oregon State University, he co-founded the school’s influential development tank Open Source Labs, and was an executive at Portland startups Janrain and Vidoop. 

In 2008, he created a company to sell bacon on the Internet—called bacn.com, because “that vowel is an extraordinarily expensive vowel”—and, after building sales to 400 to 600 pounds of pig daily, sold it to a rival bacon-selling website, baconfreak.com. He then co-authored a book about the project, From Idea to Web Start-up in 21 Days: Creating bacn.com. He confidently misremembers the title of the book, published last October, as “Makin’ Bacon.” Kveton doesn’t look back.

“You have to go at this frenetic pace,” he says, flexing his thick shoulders as if preparing for his next barrage of words. “You have to fail faster.” 

It is perhaps for this reason that one of Urban Airship’s principle hiring criteria is “the airport test”: “If you were stuck in an airport with this person for eight hours because your flight was delayed, would you be psyched about that?”

Yet Kveton is convinced that his company is no flash in the pan.

“We’re a pickax-and-shovel business,” he says. “When you saw everybody run to the gold rush back in the 1800s, it was the folks that were selling pickaxes and shovels that did really well. I mean, Levi’s is a great example. They sold clothes to the people that were there. And they found, ‘Jeez, there’s a market for people who want these kinds of clothes,’ and they grew a business from that. Our goal is to grow a sustainable business that’s interesting, regardless of if it’s a gold rush or not.”

Credits: vivianjohnson.com

The State Secret

Name: Danielle Forsyth

Age: 51

Title: CEO, Thetus Corporation

Venture capital funding: $4.6 million

What colleagues say: “She’s a dork, like all great CEOs are dorks. And she is just killing it. Knocking it out of the park.”

Danielle Forsyth likes to say that Thetus Corporation makes Internet software for “people who don’t know what they don’t know.”

That Rumsfeldian phrase is fitting: Few people in Portland have any idea that a woman CEO—a rare sight on the tech landscape—is helming one of the city’s fastest-growing software startups, a company that’s been profitable for five years mostly thanks to federal government contracts.

Thetus has intentionally maintained a low profile locally. “We don’t have clients here,” Forsyth says, “and we’re really focused on growth.” 

One of the company’s first clients was in fact the National Geospatial-Intelligence Agency, a wing of the Department of Defense that handles satellite imagery and maps. As Thetus took two rounds of venture capital after its 2003 founding, it also got an undisclosed amount of funding in 2005 from I-Q-Tel, a nonprofit venture fund created by the Central Intelligence Agency. Thetus now has a range of private clients, but its backbone is contracts with the Departments of Intelligence, Justice and Agriculture, as well as several Department of Defense commands. It is working on software for “accountability for things like Terrorist Watch Lists.”

All of this sounds almost comically un-Portland, and it may not help that Forsyth is clandestine about personal information: She won’t even say where she went to school. But she’s eager to talk about what Thetus makes, how it has moved into the private sector to work with groups like Mercy Corps, and how she believes every software product it develops is used to prevent war.

This image is taken from an interactive map of Portland software startups, created on Thetus Corp.'s Savanna multidimensional analysis software.

Credits: Courtesy of Thetus Corp.

What Thetus makes for the feds is Web applications, like its new release Savanna 2.0, that provide “multidimensional analysis” of data—a fancy way of saying it builds online three-dimensional spreadsheets and models that show, in pictures, the differences and similarities between different groups, and displays them from different perspectives. That’s catnip for intelligence agencies working in unfamiliar countries and trying to guess at the connections between cultures they don’t know much about.

“So, say I’m negotiating a grocery-store contract in Turkey,” Forsyth says, “and I know as much as an American might know about Turkey, and I’m looking at demographics and economics of where my grocery stores might fit. But there are certain things in any foreign environment that you’ve got to consider: Are you close to religious institutions that might be offended by you being open? Our world has a lot of maps of relationships, maps of how affected things are by other things. That’s what our thing does.”

The outside of Thetus’ Old Town office looks nothing like a tech company—it’s just another stately building on the downtown MAX line. But the company headquarters is a 20,000-square-foot space covered floor to ceiling with dry-erase boards and windows covered in equations and technical doodles.

The company’s real secret may be that it’s a defense contractor with a decidedly liberal culture. “We do business what we call ‘the Left Coast way,’” Forsyth says. The company built its hardwood floors out of reclaimed timber taken from defunct Vancouver basketball gym the Hoop. It offers free college courses to all of its 70 employees. It switched its health insurance company to provide benefits to gay couples.

Forsyth, whose gentle mannerisms resemble a dean of students at a touchy-feely college, is especially proud of Thetus’ in-house jam band, which plays about once a week and consists of any programmer who can play an instrument. Which is how, at the 2010 company retreat, 25 Thetus musicians improvised tunes into the night in the meeting room of the Hotel Oregon in McMinnville. Forsyth played flute.

Credits: vivianjohnson.com

The Banker 2.0

Name: Alex Payne

Age: 27

Title: Chief product & technology officer, BankSimple

Venture capital funding: $3.1 million

What colleagues say: “Alex Payne, in terms of the Web, is very much a celebrity.”

“Potentially revolutionary, but they don’t know much about banking, so it’s a massively naive plan as well.”

Alex Payne was once a Bank of America customer. He says this explains why he’s now mounting a direct challenge to the financial giant.

“I haven’t met too many happy Bank of America customers, I’ll tell you that,” he laughs.

Payne has one of the hottest résumés of any Portland programmer: He was one of the first employees hired by Twitter, where he worked for four years in San Francisco on the social network’s developer platform—the program that allows outside programmers to link their applications to Twitter.

His arrival in Portland last summer caused a buzz in tech circles—especially when he quit Twitter one week later to join BankSimple, a Brooklyn-based startup, founded by New Yorkers Josh Reich and Shamir Karkal.

Let’s clarify one thing: BankSimple isn’t a bank. Instead, it is a front end for banks: A Web application company that plans to partner with established commercial banks with no previous retail presence to provide checking and savings accounts and debit cards, as well as credit lines and personal loans.

Payne contends that this pared-down, exclusively online and mobile banking can beat Wall Street firms by targeting people who find most bank policies byzantine and daunting, and offering them great customer service.

“The [major] banks are more interested in earning revenue from fees and charges than they are from doing traditional banking and helping their customers out,” Payne says. “Those banks have, in some cases, actually invested in custom software that is designed to re-order transactions in such a way that more fees happen. If you don’t mind alienating your customers en masse, it’s a great way to make a pile of money.”

BankSimple will charge no overdraft or maintenance fees. (It plans to make money from interest on loans, plus the small earnings every bank gets when a debit card is used.) The company will eliminate the distinction between checking and savings accounts, automatically transferring funds to earn the most possible interest. It will provide customers with a “safe to spend” balance based on bill-payment patterns. Most daringly, it will automate budgeting for customers trying to save toward individual goals.

The company will begin a gradual launch this summer—Payne and his Brooklyn partners are testing their own debit cards this month—but it already has a waiting list of 50,000 people who have signed up to bank with anonymous lending institutions through BankSimple.

Payne expects the major banks to retaliate with their own reforms, but doesn’t think they can keep up. And he’s not worried about being muscled out through the regulatory system: “We certainly have our own lawyers, we have our own banking-industry consultants.”

As BankSimple’s anchor in Portland, Payne sees an opportunity to combine the city’s famed liberal conscience with digital innovation. 

“When I look at a lot of other young techie folks,” he says, “they’re working for gaming companies. I think there are some more fundamental problems. When you pick up the paper every morning and you see people losing their homes and losing their jobs due to a massive financial crisis and a clear lack of ethics and compassion in that industry—there’s clearly a problem there that technology could help solve.”

Bespectacled and soft-spoken, Payne is most immediately noticeable for some very loud tattoos. On his right shoulder is a multicolored portrait of Ada Lovelace, Lord Byron’s daughter, who helped write the first computer algorithms in the 19th century. On his left forearm are two Chinese characters: “This is a reminder that everything changes.”

Credits: vivianjohnson.com

The Exit Strategist

Name: Nitin Khanna

Age: 40

Title: CEO, MergerTech Advisors

Venture capital funding: None

What colleagues say: “He’s actually been quite a lightning rod in the [startup] community. He’s an entrepreneur’s entrepreneur.”

While most Portland tech executives are trying to get into the software business, Nitin Khanna is interested in getting them out. His formula is simple: He’s a multimillionaire who thinks Portland urgently needs more people as rich as he is.

“The only way to create the kind of investing that’s going on in Seattle and the Bay Area is to create tech millionaires here in town,” Khanna says. “If we’re not keeping them in town and not helping them exit [their companies], that work’s never converting into wealth—and therefore not being multiplied for future companies.”

Khanna says this from a couch in the lobby of the Hotel Lucia. Parked outside on Southwest Broadway is his white Maserati with the license plate “KHANNA.” It’s the second one he’s bought since selling Saber Corp., the software company he founded with his brother Karan, for $420 million to Electronic Data Systems in 2007. Saber started by making voter registration and driver’s license-processing software for the state of Oregon, and by the time the Khannas exited, the company had expanded to provide similar software to elections, DMV and child-services departments in 46 states.

Khanna, who was born in Ambala, India, and spent his childhood watching his uncle sell wood and coal, now lives in a condo in the South Waterfront’s John Ross tower. (“Helps my liver not being by all the bars,” he says, though he adds that he’s thinking of opening his own pub there.) He says the millions haven’t changed his life. “Hardly. I probably travel over a hundred days a year for pleasure, but other than that freedom, I’m much more deeply involved with my kids.”

But he’s sure that enough fellow tech millionaires would create a groundswell for software investment and mentoring—and local entrepreneurs who can start a second company with plenty of cash on hand. So he and Karan have started MergerTech, an investment bank designed to help startups “exit” by selling to a buyer.

The bank aims only for startups trying to sell for less than $100 million: “The big banks won’t look at you” if your company is that size, he says. “In my mind, there was an almost complete gap—there was almost no solution for that entrepreneur to say, ‘I want, not a broker, not somebody who knows a few guys, but an actual investment bank with investment bankers who are very tech-savvy and who’ll actually market me on a global basis.’”

MergerTech’s first big sale was last month, when it struck a deal for the purchase of year-old Portland startup SecondPorch—which links vacation homeowners with potential renters—to a similar company in Austin, Texas, called HomeAway.

In April, Khanna announced the start of another group—this one a private-public partnership—with the same millionaire-producing goal: Portland 100, a Portland Development Commission-led initiative that seeks to identify 100 local companies in technology, apparel and alcohol that could eventually be sold for millions. The project officially kicks off this week, with the vocal support of Oregon State Treasurer Ted Wheeler. 

So, how soon can Portland’s software scene compete nationally? Khanna mulls that question.

“Three to five years, maybe,” he says. “Because it’s been a drought, and we need to fix that. Over a 15-year period, with two bubbles, we haven’t had one company be north of a half-billion valuation from start to finish. None that I can think of.” 

But he believes that helping companies stay and sell is the answer. “If we can do that, we are going to be Boulder or Austin.”